Consider the following steps taken by the Reserve Bank of India with respect to money supply and arrange them in the appropriate sequence.
(A) Increase in lending rates by commercial banks.
(B) Contraction in credit.
(C) Increase in bank rates by the Reserve bank of India.
(D) Increase in cost of borrowings by commercial banks.
Choose the correct answer from the options given below:
Consider the following steps taken by the Reserve Bank of India with respect to money supply and arrange them in the appropriate sequence.
(A) Increase in lending rates by commercial banks.
(B) Contraction in credit.
(C) Increase in bank rates by the Reserve bank of India.
(D) Increase in cost of borrowings by commercial banks.
Choose the correct answer from the options given below:
Solution
Option 1 -> Incorrect sequence - starts with commercial bank action rather than RBI policy.
Option 2 -> Incorrect sequence - illogical order of events.
Option 3 -> Correct sequence following the transmission mechanism of monetary policy.
Option 4 -> Incorrect sequence - contraction happens before increase in lending rates which is illogical.
Hence, Option 3: (C), (D), (A), (B) -> This represents the correct transmission mechanism of RBI's contractionary monetary policy. First, RBI increases the bank rate (C), which is the rate at which it lends to commercial banks. This directly increases the cost of borrowings for commercial banks from RBI (D). To maintain profit margins, commercial banks pass on this increased cost by raising their lending rates to customers (A). Finally, higher lending rates discourage borrowing by businesses and individuals, leading to contraction in credit (B) and ultimately reducing money supply in the economy. This sequence shows the complete chain of cause and effect in monetary policy implementation. -> correct
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2026: 11 May Shift 1